The global luxury goods industry, includes drinks, fashion, cosmetics, fragrances, watches, jewelry, luggage and handbags. This indusry has been on an upward climb for many years. Although the technical term ‘luxury good’ is independent of the goods’ quality, they are commonly considered to be goods at the highest end of the market in terms of price and quality.
The world today allows the consumers to make an unlimited amount of choices when choosing to buy a product. Even when buying a simple t-shirt there are a vast number of brands that may be considered, ranging from Zara to Gucci. A parsimonious person may opt to buy a cheap modest t-shirt that simply gets the job done; as long as it fits, the person may not mind which brand is from. However, many people will often prefer to spend for the T-shirt that comes from brands with “name value”, for example for the brands that are well known and possibly charge a great deal more for their products.
But what motivates people to buy products from more well-known or expensive brands? Is it because they are willing to pay more for quality? Or is it because they simply like the fact that names of those brands are well known?
Therefore, this paper will discuss the popularity of these luxury brands in detail, will analyze the consumer psychology and willt point out he main reasons that influence people to buy these products and their effect on overall economy.
2. BACKGROUND INFORMATION
2.1 Definiton of “luxury”
According to Merriam Webster, luxury is : “something adding to pleasure or comfort but not absolutely necessary”. This definition reflects the fact that brand name goods offer more utility to a buyer despite a higher price tag.
In economics, luxuries are defined as products that increase in demand as income gets higher. Shortly, they are goods that are not necessary but desirable.
Also an explanation of the term “luxury goods” can be found in the etymology of the word “luxury”:” Word luxury comes from Latin “luxuria”, which means excess or “extras of life” (Danziger 2005 p. 51).
For the purposes of this paper, I will focus on product categories that contain relatively large sample sizes, such as handbags, jeans, clothes, and jewelry. From these product categories, brand names that are generally considered boutique or upscale will be mentioned. Some examples of notable brands that will be discussed in this paper include Louis Vuitton, Gucci, Zara etc.
2.2. The Current State of Luxury Market and the most valuable brands
The overall luxury market – encompassing both goods and luxury experiences – grew by 5 percent to an estimated €1.2 trillion globally in 2017. Sales of luxury cars continued to drive the market, growing at 6 percent to reach €489 billion in total. Luxury experiences remained very attractive to customers, as illustrated by sales of high-end food and wine both growing by 6 percent from last year, and sales from luxury cruises experiencing impressive 14 percent annual growth.
These are the top-line findings from the 16th edition of the “Bain & Company Luxury Study,” released in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation.
Bain expects this positive growth to continue at an estimated 4 to 5 percent annual growth rate in the next 3 years, with the market for personal luxury goods reaching €295-305 billion by 2020.
The most famous and valuable luxury brand in the world is rated LVMH (Louis Vuitton Moet Hennessy) with a brand value of about 28.52 billion U.S. dollars in 2016. The LVMH Group’s total revenue for the 2016 fiscal year was about 37.6 billion euros. Moët Hennessy Louis Vuitton, more commonly referred to as LVMH Group, is a French luxury goods conglomerate. LVMH is followed by Hermes, Gucci, Chanel, Rolex, Cartier etc.
3. Consumer Psychology of Luxury Goods
3.1. Status Consumption
Status conumption is a motivational process, with an interest in consuming for status, which involves a desire for status and conspicuous consumption. A desire for status involves an interest in status and status products. With conspicuous consumption satisfaction is derived from audience reaction not to the positive attributes of the good or service in question but to the wealth displayed by the purchaser in securing the product for consumption. While conspicuous consumption involves buying a higher priced product to inflate one’s ego, a desire for status involves buying something that represents status to both the individual and to surrounding significant others. Thus, consumption of status products may aid people in their struggle for self-respect and social epproval. The more a consumer seeks status, the more he will engage in behaviors, such as the consumption of status symbols, that increase his status.
There are many theories on why consumers practice status consumption. According to Heinemann (2008), some of the general classifications given to these motivations are basic human motivations, societal group motivations, international motivations, culture based motivations, and Chinese and Indian motivations.
4. Economic Impact
The world’s 100 largest luxury goods companies generated sales of US$212 billion in FY2015, 4.5 per cent down year-on-year. The average luxury goods annual sales for a Top 100 company is now US$2.1 billion.
Consumers in emerging markets continue to drive luxury market growth. In China, Russia and the United Arab Emirates, markets that we have categorised as emerging luxury markets, the percentage of consumers claiming to have increased their spending stood at 70 per cent, compared to 53 per cent in the more mature markets (EU, US and Japan).
What does this mean for the economy in general? The luxury goods market allows the super-rich to spend money even when the worldwide economy is down. As mentioned before, the sales of luxury goods have a remarkable tendency to stay consistent or even increase despite tough economic times. This is due to the fact that the consumers of luxury goods will always have money to spend, even when others don’t.
While those who spend lavishly may be frowned upon by the general public, it is possible that their tendency to continually consume luxury goods may help the rest of the economy in general. Despite how intricate the final product may look, the manufacturing of goods begins from the acquisition of raw materials. These raw materials are usually obtained through suppliers, whose business may not be as profitable as usual because of the decrease in demand from other sectors.
When people are faced with economic hardships, they usually buy the bare minimum that they need to survive, cutting out small amenities such as cable or new clothes. However, the rich, who are the main consumers of luxury goods, rarely have to face such choices. As such, while suppliers suffer from a decrease in demand from normal goods manufacturers, the demand from luxury goods manufacturers may actually increase. This may help the economy overall; luxury goods give suppliers a reason to stay afloat while the economy for normal or inferior goods may falter.